MARKET UPDATE: YELLEN BOWS OUT AS FED LAYS GROUND FOR MARCH HIKE

MARKET UPDATE: YELLEN BOWS OUT AS FED LAYS GROUND FOR MARCH HIKE

29th January 2018

LAST WEEK – KEY TAkeAWAYs

US/China trade relations take centre stage at Davos

Leaders gathered for the World Economic Forum in Davos, Switzerland, last week. Understandably, there was much debate around the fortunes of the world’s two largest economies. Donald Trump was on the front foot with careful attention paid to the approval of broad tariffs on US imports of solar cells and washing machines, something which did not go down well among Chinese manufacturers. Trump is committed to these and other protectionist measures, which are designed to shield US-based businesses from the threat of cheaper overseas competitors. A key soundbite from Davos was Trump’s proclamation of “America First,” though he qualified: “(this) does not mean America alone. When the United States grows, so does the world”.

UK GDP up 0.5% for fourth quarter

The UK economy grew by 0.5% in the final three months of 2017, which was at a faster rate than many had anticipated. Analysts had expected the same 0.4% figure as was posted in the third quarter of the year. For the year as a whole, the Office for National Statistics (ONS) said growth came in at 1.8%, down from the 1.9% achieved in 2016.

UK wants to vet post-Brexit EU laws

Six weeks after EU leaders gave the green light for Brexit negotiations to move on to the future arrangements, tensions have reportedly surfaced over Britain’s desire to vet new EU laws agreed by the rest of the bloc during the transition period after Brexit on 29 March next year. A European Commission memo reportedly states that “significant divergences” remain on agreeing a process to resolve any future disputes about the Brexit deal.

Japan and eurozone leave interest rates unchanged

The Bank of Japan (BoJ) and European Central Bank (ECB) both decided to leave interest rates unchanged last week, as had been expected. BoJ policymakers voted 8 to 1 to keep monetary policy unchanged; its short-term policy rate is at -0.1% and the 10-year year yield target at 0%. As discussed last week, Japan has been buoyed by recent signs of economic strength, though inflation continues to run below target. Meanwhile, the ECB announced that there is “very few chances” any interest rate rises this year – the base rate is currently 0%. ECB chief economist Peter Praet said the bank would not stop its €2.55tn monetary easing programme unless it was confident that inflation is heading towards its 2% target.

Looking ahead - TALKING POINTS

Yellen bows out as US Fed preps for March rate hike

Janet Yellen will chair her last meeting of the US Federal Reserve this week, before she is replaced by Jerome Powell. No changes to policy are expected from Wednesday’s meeting, with Powell expected to preside over an interest rate rise in March, the first of three expected this year. Since the last Fed meeting in December, inflation has picked up - excluding food and energy the core consumer price index (CPI) increased 1.8% year-on-year and was up 0.3% during December.

The Fed is currently targeting a range of 1.25% to 1.5% for its benchmark interest rate, though this is expected to be hiked to over 2% during 2018. While last week’s temporary government shutdown brought negative headlines, US equities have registered their strongest start to the year since 1987. Investor sentiment has been buoyed by the approval of recent tax reforms, while healthcare and technology companies have been among the big risers.

US Fed funds rate (%) – January 2013 to December 2017

 Rsz _us _int _rates _jan _18

Source: Federal Reserve, Tradingeconomics.com

A closer look at UK consumer confidence

Having dropped to a four-year low in December, investors will be hoping to see more positive data on UK consumer confidence this week. The latest GfK consumer confidence index data for January is due on Thursday, having fallen one point to -13 at last count. This is not the only measure of our appetite to shop, with a separate tracker from Deloitte released today (29 January) suggesting that consumer confidence remained flat during the fourth quarter of 2017 (a reading of -7%), compared to the same period a year earlier.

Deloitte’s survey of 3,000 people said that overall confidence rose in the second half of 2017 with record levels of confidence in relation to job security. Data for September to November last year, released by the Office for National Statistics (ONS) last week, showed some 1.44 million people out of work, meaning the UK unemployment rate remains at a four-decade low of 4.3%.

Deloitte consumer confidence index – Q4 2011 to Q4 2017

 Deloitte UK CC

Source: Deloitte

THE OMNIS VIEW

Through a well-diversified approach to asset allocation, the Omnis investment team aims to defend and grow the value of your portfolio through market cycles. After four years as the Fed chair, Janet Yellen leaves behind a US economy in the middle of a hiking cycle, with full employment but with stubbornly low inflation. It’s a largely positive legacy, with US equities having shown sturdy growth during the period.

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